Monday, March 2, 2009

How to Bump Up Your Savings with Certificates

Certificates of Deposit (CDs) aren't the sexiest investment ever invented. But they're still attractive because they are safe, insured and guaranteed. But who wants a measly rate like 3% on a 5 year Certificate? Okay boys and girls you can stop moping about because there is a flavor of Certificates that's not so plain.

To make Certificates an attractive part of your overall plan you should look for the words "bump" or "step-up" or any other words that act as euphemisms for moving higher. These types of Certificates may not offer the most attractive interest rate on the block at opening, but they offer a little assurance that you won't miss out when rates go higher.

Say you want to open a 5-yr Certificate, because of all of the typical Certificate advantages, like a good rate. With a step-up type certificate you won't be holding a loser when interest rates start rising. When that happens you decide when to call in your bump. Once you do your Certificate interest rate goes up...guaranteed. You earn more.

Here's the downside....
These Certificates are tricky. Be sure that you read through and understand all of the associated fine print. They usually work something like this:
  • You can only bump up one time during the term of the certificate.
  • You may have to give a specified number of days notice before your rate is bumped up.
  • There is always the gamble that rates could raise again after you've selected to bump.

Why FIs offer Bump Certificates

Whenever interest rates are low FIs experience lower savings deposits. To balance things out they've got to attract more deposits. The Bump or Step-up Certificate is a better marketing device than simply higher paying accounts. On high paying accounts the FI is more likely to pay too much interest out. The Bump or Step-up is better for them because:

  • Some people never take the bump, because they've forgotten about it.
  • Some people take the bump too early, before rates have peaked.
  • Some people hesitate too long to bump.
  • The product is structured for the rate-bump to coincide with an extension of the maturity date. Customers are hesitant to extend the term if they feel that rates will continue to rise.

If you open a Step-Up don't fall into these over-thinking it types of traps or you'll come out a complete loser. Not even Warren Buffet can really predict where interest rates will go in 5 years, so don't be so hard on yourself. When the rates begin to climb wait at least 6 months and then take your bump. Even if they continue to rise you'll be better off than when you started.

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